Freaking Dommed by Doubling Power

The Mogambo finally looks something up on his own. It is quite momentous; but it is simultaneously quite sad, as he discovers the truth about the raging inflation that is destroying our economy.

Dave Gonigam at The Desidooru Saloon reports that it looks like the "economic stimulus plan" being formulated and enacted by the government will, "result in tax rebates of $300 per person, $600 per couple, just like when the same scheme was used in 2001."

The funny part is that Gonigam notes that, "$300 per person did nothing to goose the economy in 2001, and it’ll do even less now." Immediately, they were hooted down by non-believers who said, "Says who? You? If you are being quoted by that Lowlife Mogambo Idiot (LMI), then you must be an idiot, too!"

But good old Dave was cool, and just said, with the hint of a mocking smile in his voice, "Using the Minneapolis Fed’s handy-dandy inflation calculator, just equaling that figure adjusted for inflation would take $350." Hahaha! Thanks to the incompetence of government, the dollar has been devalued by 17% since 2001? Hahaha! We’re freaking doomed!

"And", he goes on, "God only knows what it would be if the inflation numbers weren’t doctored; the fearless John Williams says if the CPI were calculated the way it was back in Jimmy Carter’s day, it would be close to 12%." Yikes! Inflation at 12%!

Hoping that they were wrong, because this rate of inflation would be horrendous, I went to Mr. William’s to find, sure enough, that inflation has taken a sudden spike to 12%, with no sign of stopping! Yikes!

Suddenly, I was surprised that people were clapping me on the back and congratulating me on actually looking something up for myself, instead of me always stealing the ideas and work of other people and other employees.

And it must have surprised Bill Bonner, too, who also had a wry take on the stimulus package, which, "is only $145 billion. U.S. stocks lost more than twice that much in the first few seconds of trading (Monday)." Hahaha! Good point!

And when you plug this kind of loss into the Federal Reserve’s precious little models containing the "wealth effect", then things get real gloomy, and pretty soon you are really getting scared, and you know it is only a matter of time before you pee in your pants out of sheer terror, and I’ll bet everyone at the Federal Reserve is wearing a disposable adult diaper under their clothes right now, just like I am here in the Ultimate Mogambo Bunker (UMB), and believe me it is mighty, mighty comforting!

Mr. Bonner, as usual, is apparently not into discussing nasty little people like me peeing in their pants and swilling wine out of a bottle in a paper sack, and says, "And the whole idea of providing more cash and credit is the wrong strategy anyway. These efforts at Keynesian stimulus were designed to overcome a different kind of enemy…a case where consumer demand was low…or where consumers saved too much money. Keynes worried that people had a ‘propensity to save,’ which needed to be corrected by reducing the returns to savers. But the real rate on savings now is less than zero. And the savings rate is down to minus 0.5% of disposable income."

"No," he says, "the problem is not that consumers spend too little, but that they spend too much they don’t have. Nor is the problem that consumers save too much, but that they don’t save enough."

True enough! And then I notice that all of this leads to the big freaking problem of falling tax revenues. As the American economy morphed into one that relies on government spending for over half of all economic activity, any drop in revenues is bad news at the federal level, but catastrophic news if you are a citizen in one of the states that spent every extra dime of revenue from the boom to create permanent spending programs. And most did! Hahaha!

Jim Sinclair at agrees with me, even though everyone is too polite to tell him so, and says that, "lower economic activity equals lower profits", which is bad enough for investors, but that, "Lower profits leads to lower Federal Tax revenues", which is even worse for the enormous, sprawling, rapacious system of government with which we have saddled ourselves, which is enough to send me into a Mogambo Screaming Fit Of Outrage (MSFOO) because these government weenies are going to be borrowing lots and lots and lots of money, creating money and debt like crazy during the long, ugly coming economic downturn, which means higher taxes at the exact wrong time of the cycle or less government spending at the exact wrong time of the cycle, too.

In fact, I was actually taking in a deep breath to really start the MSFOO in style, when I was saved from certain embarrassment by Mr. Sinclair, who says that the problem is a lot worse than I think, because, "Lower Federal tax revenues in the face of increased Federal spending causes geometric, not arithmetic, rises in the US Federal Budget deficit. This is also true for cities & States as it is for the Federal government."

And if you want to see what happens in a geometric rise, take a blank piece of paper and write down a 1, double it to get 2, double that to get 4, double that to get 8, double that to get 16, and keep doubling and doubling until the numbers reach a point where you suddenly leap to your feet and say, "Holy crap, Batman! That Stupid Mogambo Moron (SMM) is right; we’re freaking doomed!"

Until next time,

The Mogambo Guru
for The Daily Reckoning
February 4, 2008

Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter – an avocational exercise to heap disrespect on those who desperately deserve it.

On Friday, the Dow went up another 93 points. Oil slipped below $90. The dollar is holding at $1.48 per euro. And gold dropped $14.50 to $913.50.

The newspapers are reporting "first job losses in four years" and warning of an economic slowdown…or recession. Polls of economists put the odds of recession at 40% to 50%, for whatever that is worth.

But the biggest stories are always the ones that go unreported. They are missed because they are too hard to understand or too ugly to look in the face.

The big story of the 20th century was the ascension of politics…or maybe we should say, ideology. Everyone was whipped up into such a lather by political ideas that he practically foamed at the mouth, ready to bite any opponent who got in his way. Reporters told the story of what the National Socialists in Germany were doing…or what the Bolsheviks were up to in Russia…or the Khmer Rouge in Cambodia…or the Shining Path in Peru. In America, it was the New Deal or Morning in America that excited the voters. But hardly anyone noticed the big story…of how the whole world had turned in the same direction, towards politics itself.

Then, the world turned again – towards money. Politicians hadn’t made things better; instead, they seemed to make them worse. Subtly, hardly realizing that they were doing it, unannounced by the papers, people began to look elsewhere. "Government is not the answer," said Ronald Reagan. What, then? Money. The real solutions to the world’s problems were thought to be financial solutions. What caused economic growth? How could foreign investment be increased? How could the world’s poor be lifted up from their misery? What was Lee Iacocca’s saying? People wanted to read the memoirs of industry leaders and find out how ‘elephants can dance’ and other secrets. Ronald Reagan and Margaret Thatcher led the way, speaking of ‘market solutions’ and of how the free enterprise system could make people rich…and how entrepreneurs could be unleashed to create wealth for everyone. And The Wall Street Journal became America’s most widely circulated paper.

Poor countries got new advisors. Che Guevara was dead. Now came Jeffrey Sachs. And Warren Buffett attracted bigger crowds than Lenin; and was quoted more often than Karl Marx.

But the world keeps turning. And now the old complainers are back. Barney Frank wrote a piece for the Financial Times, telling the world that the "laissez faire" system had failed. Robert Reich followed up with a kvetch about how the rich had gotten too rich. And practically every candidate for office promises more and better regulation of the financial industry.

The complainers are idiots, it’s true. But they have a point: Reagan’s capitalism was a failure. Cometh now the nasty facts. We’ve been talking about them here in The Daily Reckoning for the last eight years. Everyone knows them. But they are so disagreeable and so at odds with everything we have come to believe, they are ignored.

Capitalism produces wealth; it makes people richer than any other system. Capitalism we define as merely a state of nature…where people are free to go about their business based on customary, consensual rules in an evolved, vernacular market system. The more you tamper with it, the less well it works.

The Reagan years brought a new respect for capitalism…evidenced by lower marginal tax rates and less regulation. All else being equal, people should have gotten wealthier at a faster clip – especially since the U.S.A. had just humbled its only substantial enemy, the Soviet Union, and taken up the new Information Technology quicker than any of its commercial rivals. Americans should have gotten richer, faster, than at any time in history. They were the world leaders in capitalism, technology, innovation, financial sophistication, education and market efficiency. But in practice, the average man in America got poorer. According to figures sited by Robert Reich, a former U.S. Secretary of Labor who ought to know, the average man today earns 12% less per hour worked than he did in the early ’70s, a fact disguised by longer working hours, more spouses on the job, and debt.

And now word is getting out that the boom of the last five years was a fraud. "Boom was a bust for ordinary people," says a Washington Post story. The common man didn’t get ahead in the boom; he fell behind.

What does it mean to be wealthy? Either you earn more…or you have more. Americans don’t earn more. Do they have more? We don’t know. We haven’t seen any comparisons. Probably not, though…since their debt levels per person doubled in just the last eight years.

How could it be? How is it possible that in the greatest explosion of economic activity in human history, the economic front-runners were left out?

The candidates for America’s highest office don’t know what to say. They promise to "bring back the American dream" but have no idea what happened to it…or what made it possible in the first place. The Democrats propose higher taxes on "the rich" and more regulations on Wall Street. The Republicans propose more giveaways…higher spending…and hint vaguely that, when it comes to money, they know what they are doing.

But no one really knows anything.

Only here at The Daily Reckoning, at least we have a theory. Not a very good one…but it’s the best we can do. More tomorrow…

*** The lines have been drawn, says Capital & Crisis’ Chris Mayer.

"There is August 2007… and then there is everything after that. Things are different now.

"The credit crisis has spread. Commercial real estate looks like it will also suffer a hit. A recent Wall Street Journal carried an interesting story on this. It told the tale of Ian Bruce Eichner, the developer on a big project in the heart of Las Vegas. He defaulted on $760 million in debt.

"These kinds of stories are starting to pile up. There was Centro Properties, one of the largest owners of shopping centers in the U.S. Its stock went belly up after choking on $3.4 billion in loans it could not refinance. Then there is that big New York developer Harry Macklowe. He’s choking on some $7 billion. It’s like a big hot dog-eating contest gone bad.

"And what’s true at the top cuts true all the way through. I was talking to my mom last night. She’s in commercial lending for a small local bank. She was telling me how she was turning down people left and right and how bad it looks with people losing money on all kinds of real estate. Then, on Thursday, my old bank dropped a bomb by reporting a loss for the quarter. The stock sunk 10%, to settle in at $15 per share. The high back in March was $36.

"According to The Wall Street Journal, total subprime write-downs now top $100 billion…"

Despite all the bad news, Chris has managed to stay excited. He’s got some good stuff he’s working on for the next issue of Capital &Crisis – including some fascinating info on the effects of World War II on infrastructure – and some interesting investment angles.

*** The big news over the weekend was that French president Nicholas Sarkozy has married the woman of his dreams in the Elysee Palace. Carla Bruni is apparently the woman of many mens’ dreams; she has the reputation for a love ’em and leave ’em kind of social life, including other well-known politicians and rock stars, such as Mick Jagger, among her paramours.

How did a nice girl like that end up in a place like the Elysee Palace? And what does it matter to readers of The Daily Reckoning? A little background: she was born into a family of rich Italian industrialists. Both mother and father were talented musicians too. Then, it emerged that her biological father was a Brazilian (her mother seems to have allowed herself a certain amount of liberty in the swinging ’60s) about whom not much is known. Carla was rich, beautiful, talented and extremely well educated. She speaks four languages…she has been a supermodel…she plays the guitar…she sings…and now she has a hit album in the shops.

Why would a woman like that want to marry a short politician? She didn’t even support Sarkozy in the presidential campaign; she was for his opponent, Segolene Royale.

But we have a new phenomenon in politics – the power couple…and the connubial succession. That, of course, is what Hillary Clinton is banking on. Christina Kirschner pulled it off in Argentina. (Where Juan Peron’s third wife, Isabelita, had blazed a trail years before.)

If Hillary wins, the United States will have suffered under Clintons and Bushes for at least 24 years…and perhaps 28. Nearly three decades in two families…and where’s Chelsea?

Do you see how democracy has evolved…and the world with it? The mob no longer wants ideologues with their ideas and ‘isms.’ Now, it wants celebrities. It wants royals. It wants faces familiar to Oprah and People Magazine.

What is the difference, ideologically, between the Republicans and the Democrats? Does one oppose military adventurism overseas, while the other supports it? Does one favor programs to care for the old and the ill, while the other thinks people should take care of themselves? Is either party willing to let Mr. Market do what he wants, or to put it another way…does either party favor real capitalism? The answer to all these questions is ‘no.’ The voter no longer cares about ideology, and neither do the political parties. Besides, the ideas are too fuzzy for them to grasp anyway…and a bit off-putting. Dr. Ron Paul, quoting from the U.S. Constitution, is regarded as a subversive.

And yet, each party must court the marginal voter – who is as big a nitwit as his leaders. Each must promise more of other people’s money…and more safety from (largely imaginary) enemies. With no real ideas at stake, each party brings out its celebrities…its movie actors…its sons and wives. Each must pretend to care about the poor and downtrodden…and pretend to know how to protect Americans from foreigners…and pretend to have a cure for whatever ails the economy…all while having no real ideas on the subject.

Until tomorrow,

Bill Bonner
The Daily Reckoning